U.S. wheat market cools off

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This time last year, Southeastern growers were scrambling to find wheat seed as the market soared. But a lot can change in one year.

Looking back to what caused the jump in wheat prices, there were declining world stocks in the 2006-07 marketing year and in the 2007-08 marketing year, says John Anderson, Mississippi State University Extension economist.

“These declines were due largely to production problems,” said Anderson at the recent Southern Region Agricultural Outlook Conference in Atlanta. “There was a drought in Australia, and there were wet springs and summers a couple of years ago in Eastern Europe. In addition, there was cold weather across Canada that damaged their spring wheat crop. A lot of things happened at the same time, any one of which would have been a big occurrence.”

Altogether, he adds, these factors created a phenomenally tight wheat market. “There were also some other things, including institutional issues in the markets. The tight stocks really were the foundation of these soaring prices we saw in the late winter of 2008. I never would have imagined wheat prices would have soared as high as they did,” he says.

But there was a large corrective production in 2008, and that will increase stocks, says Anderson. “Everyone in the world grows wheat. I think strong fundamentals in corn and soybeans will continue to support wheat prices, but the wheat fundamentals are not currently as supportive as they have been for the past year,” says.

Looking across the Southeast, farmers have a lot of options as far as which crop to plant, and Anderson doesn’t believe wheat will be a popular choice.

“I don’t think we’ll plant much wheat at all in Mississippi,” says Anderson. “Our farmers are a lot more comfortable planting early soybeans. They want to be able to go in during March and then get their beans out. Wheat just isn’t compatible with that system. You also have to consider production costs.”

Growers, says Anderson, feel as though they “really got burned” by the wheat basis.

“The wheat basis has been very weak, and the basis for a lot of other crops has been weak. But we need to revise our idea of what ‘normal’ is. What I see with producers is that they say the corn basis is 60 cents under and that’s not normal. So we need to adjust what we thought was normal from three or four years ago, because that is no longer normal.

“None of the other costs in the system are consistent with that, so we can’t expect the lows to be consistent with that any longer. Obviously, there are some other things going on with wheat, but in general, we have to be cautious when we talk about basis — basis is much weaker than normal. What’s normal now is certainly not what was normal back in 2004. But a lot of the producers with whom I’ve spoken are not thinking in those terms. A lot of things are different today.”

The U.S. wheat balance sheet, says Anderson, is a good indicator of where the current market is heading.

“Looking at the U.S. balance sheet, the key here is if you look at what was happening with ending stocks from 2005 to 2006 and through 2007, when we had fairly consistent reductions in ending stocks until we got to a pretty low level. The world balance sheet was doing the same thing, and we really got down to a historically tight situation.

“We are now building back quite a bit, actually up to a higher level than we had in 2005 in terms of ending stocks. Wheat supply can turn around very quickly, and I think we’re seeing that this year, not just in the United States, but globally. There are so many places in the world that grow wheat, and that have the potential to produce wheat, that this supply situation is going to continue to loom up and kind of undermine the fundamental support in the wheat market.”

Looking at the wheat stocks-to-use ratio, there is a large increase between this year and last year, says Anderson. “We’re going back to a level that sort of looks normal, if we have any idea of what normal is. But USDA projected price does not necessarily reflect that change in the stocks-to-use ratio.”

Turning again to production prices, Anderson says it is “unbelievable” how fertilizer prices have climbed since April. “This will keep our guys out of wheat. Between this and the wheat basis, and the potential to do well with soybeans, we’re not going to see much wheat, and I don’t think we’ll see that much corn. We’ll see a lot of soybeans and some cotton in Mississippi.”